I was heartened by the response to the publication of the links to the free-to-all version of my PREFS spreadsheet in yesterday’s Real Money column. If you requested access, and haven’t yet been given permission to view the sheet…hold on! I am working on it! That spreadsheet is, as the kids would say, the way I roll.
It has large descriptive copy-pasted passages on each security from a website that is my fixed-income investing bible, www.quantumonline.com. Those descriptive passages are very important, and offer the types of information that are not available on schlock-filled sites like Robinhood (HOOD) or Seeking Alpha.
That data – call dates, maturity dates, floating-rate features, etc. – are crucial to understanding bonds and preferred stocks. I am sorry if that is more involved than listening to some nitwit scream inanities like “Netflix BUY!” (NFLX) or “Elon Musk is unassailable” (TSLA) on FinTV, but capital preservation comes with a cost. More homework.
This is when things get tricky and where managers who actively manage assets, like me, have to prove our mettle. Interest rates are in a pronounced uptrend, the likes of which haven’t been seen in decades. The last period in the bond market – as I noted in yesterdays’ column, I use the 12-month UST as a reference – that remotely approaches what we have seen in the past 12 months is the period from April 2004-Ocotber 2007. We all know how that ended.
If you know rates are rising, you might choose the portfolio management decision to accept some degradation against par value in your fixed-income securities to capture the income streams. I am. PREFS was down 2.94% since inception on 5/27/2022 as of yesterday’s close, and this morning when I checked, it was down 3.02%. Oooooooh. So what? PREFS is yielding 6.63% on an annualized basis, a figure that will only increase as income payments are reinvested. How does that compare to FedEx (FDX) today?
And that’s the whole point. The great thing about investing versus par values is that we can opportunistically reinvest dividend-income payments into securities trading below par. That gives us what I call “natural call protection.”
Six of the 10 names in PREFS are currently trading below par, and I am a little surprised not all of them have fallen below the par mark. Two that haven’t are (CUBI-E) and (ENBA) , securities offered by Customers Bancorp and Enbridge, respectively, that have floating-rate features. Those are gold in this rate environment. Pure, unadulterated Charlton Heston “pry from my cold, dead hands” names right now. In other words I am not selling them.
But with six of the 10 names trading below par, that gives the opportunity for shopping, which is what I do every quarter as the income payments roll in. Those reinvestment trades are only delineated behind the paywall at my site, www.excelsiorcapitalpartners.com. Hey, I gotta make a living!
Sales pitches aside, just be very careful with your nest eggs here. Today is a quad-witch Friday, so there will be some shenanigans with individual securities. Remember, though, the numeric price of a security really only matters when options expiration awaits. But the actual valuation of the company underlying the stock is always important, every damn day, even if the numeric stock price isn’t.
Meta Platforms (META) was valued at nearly $900 billion last September. Today? Under $400 billion and still plunging. That’s real, and that’s stagflation. Capital losses hurt. If you want to avoid them, and can handle some minor, near-term price pressure owing to higher interest rates, PREFS is a nice way to roll.
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